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A Beneficiary Form Is The Most Important Employee Benefit Form – Employee Benefits & Compensation



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The most important form in all of employee benefits is an
individual employee’s life insurance and/or 401(k) plan
beneficiary form(s). In the absence of a valid beneficiary form on
file with the plan administrator, the life insurance and 401(k)
plan documents will often control the distribution of plan proceeds
upon an employee’s death. Unfortunately, the varied
distribution protocols outlined in different life insurance and
401(k) plan provider documents are often contrary to what one might
expect would be the distribution protocol, possibly resulting in my
being required to advise a plan to pay the proceeds to an
unintended individual (e.g., a former spouse) or to the deceased
employee’s estate. In other words, the distribution of large
sums of money could potentially be against the deceased
employee’s wishes. The best way to avoid this issue is to make
sure that an individual employee’s life insurance and 401(k)
beneficiary form(s) exist, is current, and matches any estate
planning documents.

Below are two very common scenarios with possible unintended
beneficiaries:

  1. 401(k) Plan: An employee divorces and names an
    adult child his/her new beneficiary. The employee later remarries
    and dies without updating his/her beneficiary form. By application
    of law, the new spouse is automatically the beneficiary of the
    employee’s 401(k) account balance. In order for the adult child
    to retain any right to some or all of the 401(k) plan account
    balance, the employee would have needed to complete a new
    beneficiary form (post-marriage) and his/her new spouse needed to
    consent to a partial or complete transfer of the account balance to
    the adult child or any other desired beneficiary (trust, college,
    etc.). An employee’s spouse is always the employee’s sole
    beneficiary unless the spouse consents to naming another individual
    or entity as the beneficiary. This consent must be given in writing
    and filed according to the procedures set forth in the plan
    documents.

  2. Estate Planning: An employee engages a lawyer
    who prepares a will, trust, and healthcare power of attorney. The
    will and the trust documents clearly name the trust as the
    beneficiary of the life insurance and 401(k) plan proceeds. The
    employee never updates the beneficiary form(s) on file with the
    life insurance plan or the 401(k) plan. The employee later dies.
    Although the will and trust documents describe the trust as being
    the beneficiary of the life insurance proceeds and the 401(k)
    account balance, the beneficiary forms on file with the individual
    plans will govern all distributions upon an employee’s death.
    If there are no valid beneficiary forms on file, the plan
    document(s) will provide for the proper distribution of plan
    proceeds. Although the deceased employee’s family will often
    argue that the deceased employee’s will and estate planning
    documents are the clearest expressions of the deceased
    employee’s intent and that the plan(s) should follow the
    deceased employee’s intent, the will and/or trust documents do
    not override the beneficiary form(s) on file with the life
    insurance plan or 401(k) plan and/or the actual plan document(s).
    As a result, when engaging in estate planning activities, be sure
    to update all beneficiary forms to ensure that they match the will
    and trust documents.

To avoid claim disputes and potential litigation, we recommend
that all beneficiary forms be reviewed and updated at least
annually and after all change of life events (birth, marriage,
divorce, death of a beneficiary, etc.). The best way for an
employee to express his/her wishes is to ensure that an updated
beneficiary form is on file with all employer-sponsored (and
individual) life insurance plans and the 401(k) plan if any other
individual or entity other than the employee’s spouse is the
intended beneficiary.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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